India Economy - History

India Economy - History

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GDP(purchasing Power Pariy: $4.042 trillionReal Growth rate: 8.2%

Per Capita GDP: $3700(2006)

Budget: Income .............. $109.4 Billion
Expenditure ... $143.8BillionMain Crops: rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes; cattle, water buffalo, sheep, goats, poultry; fish

Natural Resources: coal (fourth-largest reserves in the world), iron ore, manganese, mica, bauxite, titanium ore, chromite, natural gas, diamonds, petroleum, limestone

Major Industries: textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery

1991 Indian economic crisis

The 1991 Indian economic crisis was an economic crisis in India that resulted from poor economic policies, inefficient public sector units, and the resulting trade deficits leading to balance of payments crisis. India's economic problems started worsening in 1985 as the imports swelled, leaving the country in a twin deficit: the Indian trade balance was in deficit at a time when the government was running on a huge fiscal deficit. [1] Russian Bloc broke with which India had rupee exchange in trade also caused problems. /By the end of 1990, in the run-up to the Gulf War, the dire situation meant that the Indian foreign exchange reserves could have barely financed three weeks' worth of imports. Meanwhile, the government came close to defaulting on its own financial obligations. By July that year, the low reserves had led to a sharp depreciation/devaluation of the rupee, which in turn exacerbated the twin deficit problem. [2] The Chandrasekhar government could not pass the budget in February 1991 [3] after Moody downgraded India's bond ratings. The ratings further deteriorated due to the unsuccessful passage of the fiscal budget. This made it impossible for the country to seek short term loans and exacerbated the existing economic crisis. The World Bank and IMF also stopped their assistance, leaving the government with no option except to mortgage the country's gold to avoid defaulting on payments. [4] [5] [6]

In an attempt to seek an economic bailout from the IMF, the Indian government airlifted its national gold reserves. [7]

The crisis, in turn, paved the way for the liberalisation of the Indian economy, since one of the conditions stipulated in the World Bank loan (structural reform), required India to open itself up to participation from foreign entities in its industries, including its state-owned enterprises. [8]

What Type of Economy Is India?

India has a mixed economy. Half of India's workers rely on agriculture, the signature of a traditional economy.   One-third of its workers are employed by the services industry, which contributes two-thirds of India's output. The productivity of this segment is made possible by India's shift toward a market economy. Since the 1990s, India has deregulated several industries. It's privatized many state-owned enterprises, and opened doors to foreign direct investment.

If you have already studied the indian economy and services notes, then it’s time to move ahead and go through previous year indian economy question papers.

  1. Explain characteristics of the Indian Economy as a developing economy.
  2. Discuss about features of Indian Economy as a mixed economy.
  3. Explain the structural changes in Indian Economy.
  4. Discuss the Indian Economy and Inclusive growth.
  5. What is the reason for the increasing population in India since Independence?
  6. Explain the obstacles to economic development in the case of the population in India.
  7. Discuss the 2001 population policy in India?
  8. Discuss the issues involved in new economic reforms.
  9. Bring out the various economic reforms why were these reforms necessary?
  10. Explain the nature of economic reforms in India.
  11. Discuss major financial sector reforms.

India is now the world’s 5th largest economy

India became the world’s fifth largest economy last year, according to data from the IMF’s October World Economic Outlook. When ranked by nominal GDP, the country leapfrogged France and the UK.

Have you read?

The country's GDP growth has been among the highest in the world in the past decade – regularly achieving annual growth of between 6-7%.

This rapid rise has been fueled by a number of factors, according to a 2016 McKinsey Global Institute report, including urbanization and technologies that have improved efficiency and productivity.

India's real GDP, however, a measure that accounts for inflation, is forecast to slow in the year ahead thanks to credit weaknesses.

As recently as 2010, India was in 9th place, trailing countries such as Brazil and Italy.

India's rise is even more dramatic across the past 25 years. Since 1995, the country's nominal GDP has jumped more than 700%.

Despite its strong economic growth, the country still faces its share of challenges. Access to development and new opportunities has been uneven, says the World Bank, varying by geographic location.

Furthermore, India remains home to one quarter of the world's poor. Just 39% of its rural residents can access sanitation facilities and nearly half the total population still defecate in the open, according to the UN.

What is the World Economic Forum doing about the skills gap in India?

According to our Future of Jobs 2018 report, more than one-half of India’s workforce will need to be re-skilled by 2022 to meet the demands of the Fourth Industrial Revolution.

With the world’s largest youth population and more than half of the population of working age, skills development is critical for India to sustain inclusive growth and development.

In late 2018, the World Economic Forum, in collaboration with India's oil and skills development minister as well as the head of business consulting company Infosys, launched a Task Force for Closing the Skills Gap in India.

The task force brings together leaders from business, government, civil society and the education and training sectors to help future-proof India’s education and training systems. Find out more about our Closing the Skills Gap 2020 initiative.

Still, significant progress has been made. Poverty reduction rates are among the highest in the world, with more than 160 million fewer people living in extreme poverty in 2000 compared to 2015.

According to the World Bank, the country is also seeking ways to ensure its future growth is more sustainable and inclusive, adjusting its policies regarding social protections and infrastructure development.

India: How a rich nation became poor and will be rich again

Does 'culture' in some way help to explain the fact that the same Indian economy that was stagnating for the first fifty years of the 20th century began to grow at a respectable clip after 1980 and was amongst the fastest growing in the world by the end of the century?

Consider the following hundred year trend: between 1900 and 1950, the Indian economy grew on the average 0.8 percent a year but the population also grew at about the same rate thus, net growth in income per capita was nil and we rightly called our colonial economy stagnant. After Independence, economic growth picked up to 3.5 percent between 1950 and 1980, but so did population growth (to 2.2 percent) hence the net affect on income was 1.3 percent per capita, and this is what we mournfully referred to as &ldquothe Hindu rate of growth.&rdquo Things began to change with modest liberalization in the eighties when annual economic growth rose to 5.6 percent. This happy trend continued in the reform decade of the nineties when growth averaged 6.2 percent a year, while population slowed to 1.8 percent thus, per capita income rose by a decent 4.4 percent a year.


Colonial Post-Independence Reform Period

1900-1950 1950-1980 1981-1990 1991-2000
GDP growth 0.8 3.5 5.6 6.2
Per capita growth 0 1.3 3.5 4.4

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1820-1992 (Paris:OECD) 1990-2000: World Bank/IMF. Although 1991 is the celebrated turning point of India's economic reforms, modest and significant reforms began in the 1980s as I explain below.

As a benchmark, recall that the West's industrial revolution took place at a 3 percent GDP growth and 1.1 percent per capita income growth after 1820. To appreciate the magnitude of the Indian change after 1980, let me illustrate: If India's per capita GDP had continued growing at the pre-1980 level, then its income would have reached present American capita income levels only by 2250 but if it continues to grow at the post-1980 rate then it will reach those levels by 2066: a gain of 184 years!

How does one begin to explain India's economic performance over the past hundred years? The Indian nationalist blames the first fifty years' stagnation on British colonialism. But a trade economist will counter this by showing that the world economy was also stagnant in the first half of the 20th century (especially after World War I) when world per capita GDP grew annually at just under one percent. 2 The main culprits, he would say, were conflict and autarky. Disgraceful protectionism by most governments between the Wars slowed both the world and the Indian economy.

Although the Indian economy picked up after 1950, the neoclassical economist would argue that it performed below the world economy, which experienced a &ldquogolden age&rdquo driven by trade expansion until 1971. Like the rest of the Third World India did not benefit from global trade expansion because it had closed its economy and pursued 'import substitution'. Moreover, Nehru's socialism had shackled the economy with fierce controls on the private sector, pejoratively called 'Licence Raj' hence its annual GDP growth was 1.5 percentage points below even the Third World average between 1950 and 1980. 3

This changed dramatically with modest liberal reforms in the 1980s and more sweeping ones in the 1990s as the Indian economy integrated with the world. In those twenty years it not only outperformed the world economy significantly but it was amongst the fastest in the world. 4 Thus, gradual technological diffusion, rising capital accumulation and productivity, and gradual education expansion help economists to explain a good deal of the story. There is also the value of time and accumulated learning through time. &ldquoCollective learning&rdquo is Hayek's term, and he applied it to the cumulative experience that generations build up which is embodied in the language, the technology, and the way of doing things. 5

But economic explanations are not enough. That India adopted democracy in 1950 before capitalism (in 1991) is also significant because democracy's redistributive pressures, such as free power to farmers and other subsidies, have dampened growth and also explain why India's reform process has been so painfully slow. Economists also find it puzzling why the liberal institutions of the British Raj did not engender faster growth during the colonial years. The rule of law, the relative peace of Pax Brittanica, a non-dirigiste administration, the railways and canals&mdashall these were market friendly moves, after all.

I believe that national confidence also plays an important role. The more damaging impact of colonialism may well have been to Indian minds&mdashit created an inferiority complex from which they have only recently recovered. Douglass North has rightly emphasized the importance of beliefs. 6 Businessmen understand the value of confidence in entrepreneurial success and in creating a climate for investment Historians too emphasize the power of self-belief in national success--Roman history and Britain's rise in the 19th century are examples of this. After Independence, India's confidence certainly rose, especially as democracy took root, but flawed economic institutions of Nehruvian socialism damaged that confidence. Once these socialist institutions began to be replaced by capitalist ones in the Reform period, confidence returned and young Indian minds finally became decolonized. I traveled extensively across India in the 1990's when I discovered this changed mood, and I think it also explains the current economic success. 7

I shall now amplify my arguments by taking the reader on a galloping tour of Indian economic history. From this story I shall draw lessons about the role of institutions and culture in development. En passant, I shall touch upon the great questions of Indian history: did the British impoverish India? Why didn't the railways engender an industrial revolution? Did Nehru's socialism dampen India's progress? What is the consequence of democracy preceding capitalism?

Let's begin with the Mughals

India's nationalist historians have portrayed its pre-colonial economy as a golden age of prosperity, and this fabulous wealth set the Europeans on their great voyages of discovery. 8 During the Mughal Empire at the end of the 16th century, India's wealth did indeed sustain more than 100 million people. With plenty of arable land, its agriculture was certainly as productive as Western Europe's, and even the subsistence-oriented peasant got a decent return. 9 India also had a large, skilled workforce that produced not only cotton but also luxuries for the aristocracy. Consequently, the economy produced a large financial surplus, which was used to support the growing Mughal Empire and finance spectacular monuments like the Taj Mahal. 10

In 1497, the Portuguese sent Vasco da Gama with a flotilla of four ships to find India's wealth. But the two-year voyage was not a commercial success and the Indians were not interested in European clothes and goods for they made far ones in India. But Da Gama told King Manuel of Portugal of large cities, large buildings and rivers, and great populations. He spoke about spices and jewels, precious stones and &ldquomines of gold.&rdquo He believed that he had found India's legendary wealth. 11

It took the English a hundred years to discover this wealth. Initially, they came to plunder but soon discovered the rewards of trade. They found that India produced the world's best cotton yarn and textiles and in enormous quantities. 12 What the Indians wanted in exchange from the Europeans was gold and silver, for which they had an insatiable appetite. Hence, there was a constant flow of gold to India, which absorbed a good deal of the bullion mined by the Spaniards in the New World. Having learned about cotton textiles from India, the English turned the tables, and brought an industrial revolution to Britain, but destroyed the lives of millions of Indian weavers.

India was a leading manufacturer in the 18th century

India was a leading manufacturing country in the world in the early 18th century. It had 22.6 percent share of the world's GDP, which came down to around 16 percent by 1820, closer to its share of world population. 13 It had a developed banking system and vigorous merchant capital, with a network of agents, brokers and middlemen. Given the enormous financial surplus, a skilled artisan class, large exports, plenty of arable land and reasonable productivity, the question is why didn't a modern industrial economy emerge in India? Instead, why did India become impoverished?

Despite a dynamic and a growing commercial sector which responded to market forces and extensive foreign trade, the truth is that 18th century India was significantly behind Western Europe in technology, institutions and ideas. Neither an agricultural revolution, nor a scientific revolution had occurred, and in the long run the manual skill of the Indian artisan could be no substitute for technological progress,&rdquo 14 and this would have needed new attitudes. Notwithstanding the surplus and the trade, mid-eighteenth India had a &ldquoper capita product perhaps two-thirds of that in England and France.&rdquo 15

There is no easy answer to the problem that the country was prosperous and the people were poor. One explanation is that even in the 18th century India had a large population and plenty of cheap labor. Prosperity comes with rising productivity and a rise in productivity depends on technology. When the supply of labor is elastic, it is more economical to hire people than to invest in machines. Hence, an Englishman observed in 1807, &ldquoIn India it is seldom that an attempt is made to accomplish anything by machinery that can be performed by human labour.&rdquo 16 There is no easy answer to the problem that the country was prosperous and the people were poor. One explanation is that even in the 18 century India had a large population and plenty of cheap labor. Prosperity comes with rising productivity and a rise in productivity depends on technology. When the supply of labor is elastic, it is more economical to hire people than to invest in machines. Hence, an Englishman observed in 1807, &ldquoIn India it is seldom that an attempt is made to accomplish anything by machinery that can be performed by human labour.&rdquo

Did the British Raj impoverish India?

India's nationalist historians have blamed the British Raj for India's poverty. The classic nationalist case is that India had been rich before the British came and colonialism weakened agriculture and &ldquodeindustrialized&rdquo India, throwing millions of artisans out of work. Britain's trade policies encouraged the import of manufactures and the export of raw materials finally, it drained the wealth of India by transferring its capital to Britain.

Nationalists claimed that Lancashire's new textile mills crushed India's handloom textile industry and threw millions of weavers out of work. India's textile exports plunged from a leadership position before the start of the Britain's Industrial Revolution to a fraction. The indigenous banking system, which financed these exports, was also destroyed. Since the colonial government did not erect tariff barriers, Indian consumers shifted to cheaper English mill-made cloth and millions of handloom workers where left in misery. British colonial rule &ldquode-industrialised&rdquo India (a favorite nationalist phrase) and from an exporter of textiles, India became an exporter of raw cotton. 17

Britain also changed the old land revenue system to the disadvantage of the farmer, who had to now pay revenue whether or not the monsoon failed. This led to famines. The worst one in 1896-97 affected 96 million lives and killed an estimated 5 million people. Although the railways helped in the trade of food crops, the enlarged national market sucked away the peasant's surplus, which he had earlier stored for the bad years. Moreover, the British government transferred its surplus revenues back to England. Since India consistently exported more then she imported in the second half of the 19th century and early 20th century, Britain used India's trade surplus to finance her own trade deficit with the rest of the world, to pay for her exports to India, and for capital repayments in London. This represented a massive drain of India's wealth. 18

In recent years some historians have challenged this nationalist picture. They have argued that Indian industry's decline in the 19th century was caused by technology. The machines of Britain's industrial revolution wiped out Indian textiles, in the same way that traditional handmade textiles disappeared in Europe and the rest of the world. Fifty years later Indian textile mills would have destroyed them. India's weavers were, thus, the victims of technological obsolescence. 19

They also found that the land tax had not been exorbitant&mdashby 1900 it was only 5 percent of the agricultural output or half the average per capita tax burden. There had been a &ldquodrain of wealth&rdquo, but it was only about 1.5 percent of GNP every year. The revisionist historians argued that India's payments to Britain were for real military and civilian services and to service capital investments. Also, the overhead cost of the British establishment&mdashthe so called &ldquohome charges&rdquo&mdashwas in fact quite small. 20 If India had its own army and navy it would have spent more. True, India did have a balance of payments surplus, which Britain used to finance part of her deficit, but India was compensated by the import of gold and silver that went into private Indian hands.

India begins to re-industrize

Indian entrepreneurs began to set up their own modern textile mills after 1850 and very slowly began to recapture the domestic market. In 1896, Indian mills supplied 8% of the total cloth consumed in India in 1913, 20% in 1936, 62% and by 1945, 76%. 21 Although India did not participate in global trade expansion between 1870 and 1913, Indian businessmen made large profits during the First World War, which they reinvested in after the war. Thus, India's manufacturing output grew 5.6 percent per year between 1913-38, well above the world average of 3.3 percent.&rdquo 22 The British government finally provided tariff protection from the 1920s, which helped industrialists to expand and diversify.

By Independence in 1947, Indian entrepreneurs were strong and in a position to buy out the businesses of the departing British. Industry's share in India's GNP had doubled from 3.8 percent (in 1913) to 7.5 percent (in 1947), and the share of manufactures in her exports rose from 22.4 percent (in 1913) to 30 percent (in 1947).

Why didn't an industrial revolution occur?

One of the intriguing questions of history is why India failed to create an industrial revolution. Karl Marx predicted that the railways would transform India and usher in an industrial revolution. Indeed, by the First World War, some thought that it was ready to take-off. By 1914, India had the third largest railway network, the world's largest jute manufacturing industry, the fourth largest cotton textile industry, the largest canal system, and 2.5 percent of world trade. 23 Although a colony, it had a very liberal regulatory regime--far more investor friendly than the one that replaced it after Independence&mdashand after the 1920s the infant industry was also favored by tariffs. It had a merchant class hungry to become industrialists. Industrialization did, in fact, pick up after the War and industry's share in national output doubled. But it was not enough to broadly transform an agricultural society. Modern industry employed only 2.5 million people out of population of 350 million.

Amiya Kumar Bagchi, the Marxist economist, suggests that the reason was the lack of effective demand during the colonial period, and this limited business opportunity. Indians were just too poor to buy modern goods and services. 24 If the domestic Indian market was small, couldn't the entrepreneur have supplemented it by producing for export? Morris D. Morris, blames supply constraints. 25 An Indian entrepreneur was uncompetitive because of a shortage of technology, skilled labor, and capital&mdashall of which raised his cost of his production. The historian, Rajat Ray, argues that Indian businessmen did not export because they made inferior products, unacceptable to the world market. In his view, technological backwardness was the single biggest failing. 26 But surely, they could have imported technology, as Jamshedji Tata, G.D. Birla, and others did.

Unlike nationalist historians, I do not think there was a British conspiracy to deliberately under-invest in India or sabotage Indian business interests. Bombay's textile mills were built with the credit, technical assistance and machines from Britain although they were a competitive threat to the Manchester's mills. I believe the industrial revolution did not occur because Indian agriculture remained stagnant, and you cannot have an industrial revolution without an agricultural surplus or the means to feed a rapidly growing urban population second, the international trading environment turned hostile with protectionism after the First World War, followed by the Depression third, the colonial government did not educate the masses, unlike the Japanese state finally, a colonial mindset pervaded the Indian middle class--even the hardiest potential entrepreneur lacks confidence when he is politically enslaved.

What is the verdict on British rule?

Did the British impoverish India? There is no question that in the 18th century it plundered and looted India's wealth, as all conquerors have done in history. But did it create on-going institutions that were to India's detriment? This has to do with the nature and theory of colonialism. True, its Industrial Revolution threw millions of weavers out of work, but it would have happened any way when the new technology reached India. British government policy could have cushioned the impact by erecting trade barriers and saved enormous amount of human suffering, but protecting handlooms would have been a temporary palliative.

Odd as it may seem, I believe that Britain did not &ldquoexploit&rdquo India enough. Had it made the massive investments in India that it did in the Americas, India would have become more prosperous and a much bigger market for British goods. A richer India would have been a better customer, a better supplier, and a firmer basis of Empire. 27 Britain's main failure was not to educate the Indian masses&mdashhence 83 percent of Indians were illiterate at Independence. Britain's education system in India produced only a thin upper crust of extremely well educated Indians, while the masses remained illiterate. 28

Although Britain could not lift Indians out of poverty, nor avert famines, it did give India the institutions of democracy--the rule of law, an independent judiciary and a free press. It built railways, canals, and harbors. It gave India almost a hundred years of peace&mdashthe Pax Britannica. Although it gave modern values and institutions, it did not interfere with its ancient traditions and religion. Hence, India has preserved its spiritual heritage and the old way of life continues. Many despair over the divisiveness of caste, but the hold of the Indian way of life is also a bulwark against the onslaught of the global culture.

Independence and 'License Raj'

After Independence, democracy took root in India and gradually the masses acquired a stake in the system, periodically electing representatives even from the lowest castes. The rulers also adopted a Fabian socialist economic path, and Indians did not turn to capitalism until 1991, although there was modest liberalization of the economy in the 1980s. Thus, India embraced democracy before capitalism, which makes its journey to modernity unique and explains a good deal.

Jawaharlal Nehru and his planners did not trust private entrepreneurs so they made the state the entrepreneur, and not surprisingly, they failed to create an industrial revolution. Instead, India experienced an agricultural revolution in the early 1970s. It thus had an important pre-condition for the industrial revolution&mdashan agricultural surplus&mdashbut the industrial take-off eluded it. Its investment rate also rose from 6 percent to well over 20 per cent, and yet it did not engender a take-off. Why?

I think there were at least six things wrong with India's mantra: one, it adopted an inward-looking, import-substituting path rather than an outward-looking, export-promoting route it thus denied itself a share in world trade and the prosperity that trade brought in the post-War era. Two, it set up a massive, inefficient, and monopolistic public sector to which it denied autonomy of working hence, its investments were not productive and it had a poor capital-output ratio. Three, it over-regulated private enterprise with the worst controls in the world, and this diminished competition in the market four, it discouraged foreign capital and denied itself the benefits of technology and world class competition. Five, it pampered organized labor to the point that it has extremely low productivity. Six, it ignored the education of its children.

Nehru's strategic planner, P.C. Mahalanobis, made two wrong assumptions. He assumed that there were no opportunities for rapid export expansion in the 1950s, and this turned out to be wrong. India discovered that tiny Hong Kong could earn more from its exports than the whole of India, as India's share of world trade declined from 2.2 percent in 1947 to 0.5 percent in 1990. He also assumed that competition was wasteful, and this was also a flawed idea because there can be little improvement in productivity without it.

Even more damaging were the creeping controls on the private sector. The most bizarre was the licensing system. It began with the Industrial Licensing Act of 1951, which required an entrepreneur to get a license to set up a new unit, to expand it, or change the product mix. A huge number of untrained clerks, engineers, bureaucrats at the Directorate General of Technical Development, operating on the basis of inadequate information vetted thousands of applications on an ad hoc basis. These low level functionaries took months in the futile, micro-review of an application and finally sent it for approval to the administrative ministry. The ministry again lost months reviewing the same data before it sent the application to an inter-ministerial licensing committee. After the Minister's approval, the investor had to seek approval for the import of machinery from the capital goods licensing committee. If finance was needed from a State financial institution, the same scrutiny had to be repeated afresh. The result was enormous delays, sometimes lasting years with staggering opportunities for corruption.

Large business houses set up parallel bureaucracies in Delhi, to follow up on their files, organize bribes, and win licenses. If the entrepreneur did finally get started and made a success of his enterprise, he was again in trouble. It was an offence punishable under the law to manufacture beyond the capacity granted by the license. India became the only country in the world where the production of sorely needed goods sorely was punishable by law. 29

The system ended in thwarting competition, entrepreneurship and growth, without achieving any of its social objectives. It fostered monopolies and it proliferated uneconomic-size plants in remote, uncompetitive locations, employing second-rate technology. Bureaucrats who did not have a clue about the basics of running a business made the decisions on the choice of technology, the size and location of plants.

Although it was becoming clear that India was on the wrong path by the late sixties, instead of changing course after Nehru, Indira Gandhi introduced more controls. She nationalized banks, discouraged foreign investment, and placed more hurdles before domestic enterprise. Hence, industrial growth plunged from 7.7 per cent a year between 1951-1965 to 4.0 per cent between 1966-1980. Productivity of Indian manufacturing declined half a percent a year from 1960 to 1985. 30

&ldquo1966-1980 is effectively the dark period for the Indian economy.&rdquo 31 . It is harder to blame Nehru for adopting the economic wrong model for socialism was the wisdom of his age and dozens of economists visited India and hailed his bold experiment. 32 It is right to blame Indira Gandhi, for by then Japan's miracle was evident, and Korea and Taiwan were following its footsteps. However, ideology is only one part of the story. An important reason for non-performance was poor implementation. Even Nehru's socialism could have delivered more and did not have to degenerate into &ldquoLicense Raj&rdquo.

India after the Reforms

Although there was modest liberalization in the 1980s, the decisive turning point came in July 1991 when the minority government of Narasimha Rao announced sweeping reforms. It opened the economy to foreign investment and trade it dismantled import controls, lowered customs duties, devalued the currency and made the rupee convertible on the trade account it virtually abolished licensing controls on private investment, dropped tax rates and broke public sector monopolies. As a result growth rose to 7.5 percent a year for three years in a row in the mid-nineties, inflation came down from 13 percent to 6 percent by 1993, exchange reserves shot up from $1 billion to $20 billion by 1993, and had crossed $100 billion by end 2003. This was as important a turning point as Deng's revolution in China in December 1978. Surprisingly, the elected coalition governments that succeeded Rao continued the reform process, and despite its slow, incremental pace, it has made India one of the fastest growing major economies in the world. 33

Indians have traditionally not accorded a high place to making money. Hence, the merchant or bania is placed third in the four-caste hierarchy, behind the brahmin and the kshatriya, and only a step ahead of the laboring shudra. After the economic reforms making money became increasingly respectable and the sons of brahmins and kshatriyas began to get MBAs and wanted to become entrepreneurs. The business pages of newspapers became livelier chief ministers in the states scrambled for private investment judges became more even-handed in industrial disputes. As a result, India is in the midst of a social revolution rivalled, perhaps, only by the ascent of Japan's merchant class during the 1968 Meiji Restoration.

There has also been mental revolution. And a changed attitude to English illustrates this new mindset. Ever since the British left Indians constantly carped against the English language. But in the 1990s this carping seemed to die, and quietly, without ceremony English became one of the Indian languages. English lost its colonial stigma, oddly enough, around the time that the Hindu nationalists came to power. Young Indians in the new middle class think of English as a skill, like Windows. This is why Hinglish (Hindi mixed with English) is spreading. Encouraged by flourishing private television channels and supported by their advertisers, the newly emerging middle classes avidly embrace this uninhibited hybrid of Hindi and English, and this popular idiom of the bazaar is rushing down the socio-economic ladder. The purists naturally disapprove, but people are more comfortable and accepting of it today because Indians are more relaxed and confident as a people. Their minds have become decolonized.

The world, meanwhile, also changed from an industrial to the information economy, and it seemed to speak to India's advantage, symbolized by its success in software and business process outsourcing. These &ldquoBangalores&rdquo have given Indians confidence and they reflect a new social contract. The new entrepreneurs did not inherit wealth they have risen on the back of their talent, hard work, and professional skills. A new self-belief has emerged among urban youth that doesn't need approval from others, especially from the West. Music composers like A.R. Rehman display an exuberant nonchalance, as do the new young Bollywood pop stars. So do new fiction writers like Arundhati Roy, designers of fashion clothes, beauty queens and cricket stars.

Some lessons

Neoclassical economic theory explains a great deal about why the Indian economy that was stagnating in the first half of the 20th century went on to become one of the fastest growing by the end of the century. It tells us, for example, that disgraceful protectionism by governments in the inter-war years in the first half of the 20th century dampened world trade and slowed down the world and the Indian economies. It also explains why India performed below the world average between 1950-1980: thinking that trade had impoverished her in the colonial period, India closed its economy and denied itself the fruits of a &ldquogolden period&rdquo in world trade between 1950 and 1970 &ldquoLicense Raj&rdquo and other institutions of Nehru's socialism also suppressed growth. Finally, neoclassical economics explains how by dismantling controls and integrating the economy with the global economy, the Indian economy has become more competitive and is growing rapidly after the reforms.

But this is not the whole story, and we must turn to institutions and attitudes to understand the incentive structure of the Indian society.60 Indians blame colonialism for impoverishing them. But we have seen that colonialism is a more complex tale. For example, it did not 'de-industrialize' India as the nationalists argued handloom textiles died in India (and the world) because of technological obsolescence. Colonialism's bigger damage was to the loss of Indian confidence, which inhibited Indian entrepreneurs. This confidence began to grow with Gandhi's freedom movement in the first half of the 20th century, and industrialization did pick up. However, its impact on society was insufficient to create an industrial revolution.

After Independence, India's confidence certainly rose as democracy took root, but flawed economic institutions of Nehruvian socialism acted as a damper. Once these socialist institutions began to be replaced by capitalist ones in the Reform period, self-assurance returned to the Indian marketplace. Today's mood in India is opposite to what existed a hundred years ago. Insecurity and inferiority filled colonial India, which is all too apparent in the writings of Bengali writers of the 19th century, such as Bankim Chandra Chatterji. Today, writers like Salman Rushdie and Arundhati Roy exhibit a matter of fact assuredness (almost a cool) that is a reflection of changed national mindset.

India embraced democracy first and capitalism afterwards and this has made a difference. India became a full-fledged democracy in 1950, with universal suffrage and extensive human rights, but it was not until 1991 that it opened up to the free play of market forces. For the rest of the world it has been the other way around. In the West, suffrage was extended gradually in the last century, and as mass political parties developed, democracy began to impinge on capitalist institutions and practices.

India's democracy has an overwhelming majority of poor voters--70 per cent still live in rural areas organized labor constitutes less than 10 per cent of total labor and the middle class is around 20 per cent of the population. Because of democratic pressures, India tried to redistribute the pie before it was baked. It set up intricate regulatory networks before the private economy had transformed a rural into an industrial society. It began to think in terms of &ldquowelfare&rdquo before there were welfare-generating jobs. The result, as we have seen, was a throttling of enterprise, slow growth, and missed opportunities. It is the price India has paid for having democracy before capitalism&mdashor rather too much democracy and not enough capitalism.

Since politics is a short run game and growth is a long run one there will never be a situation that is completely optimal. This explains why Indian politicians do not bother about education because results take a long time to come. When a politician promises rice for two rupees a kilo when it costs five rupees in the market, he wins the election. Since the mid-1960s politicians have vigorously competed in giving away free goods and services to voters. When politicians do that, where is the money to come for creating schools or improving old ones? India's damaging fiscal deficit (around 10 percent of GDP for the center and states combined) is a testimonial to the downside of competitive politics, and it teaches that the demand for publicly provided goods and services is insatiable in a democracy.

But India's problems of governance go far beyond the need to appease interests. The weakening of its democratic institutions since Indira Gandhi in the 1970s has caused widespread corruption, political violence, populist giveaways, and a paralysis of problem solving. Conspicuously absent are disciplined party organizations, which help leaders in other democracies to mobilize support for specific programs. Hence, there is an excessive reliance on the personal appeal of individual leaders to win elections. When in power leaders tend to take the easy way out, which is not to act at all.

Will capitalism, and its cousin globalization succeed in establishing a comfortable place for themselves in India? The answer depends on their ability to deliver prosperity broadly. It also depends on leaders in the government and in business to champion the classic liberal premises of free trade and competition. It needs leaders to come out say that (1) some people will not fare as well in the competitive market place (2) the winners will far outnumber the losers (2) capitalist democracy is the best arrangement we have found (4) globalization is not only a good thing, it is a great leap forward in history. My fear is that capitalism's success in India is threatened not so much by the leftists or protectionists but by the timidity of its defenders.

The curious historic inversion between democracy and capitalism means that India's path into the future is evolving through a daily dialogue between the conservative forces of caste, religion and the village, the leftist and Nehruvian socialist forces which dominated the intellectual life of the country for 40 years, and the new forces of global capitalism. These &ldquomillion negotiations of democracy&rdquo slow down the pace of economic reforms, but they also mean that India might have a more stable, peaceful, and negotiated transition into the future than say China. It might also avoid some of the deleterious side effects of an unprepared capitalist society, such as Russia. Although slower, India is more likely to preserve its way of life and it's civilization of diversity, tolerance, and spirituality against the onslaught of the global culture.

Does culture matter?

Cultural explanations have been a vigorous industry in India for more than a hundred years. Colonial officials routinely blamed India's poverty on the otherworldly spirituality of Hindu life and its fatalistic beliefs. Max Weber attributed the absence of development to the caste system. Gunnar Myrdal, the Swedish economist, found that India's social system and attitudes were an important cause of its &ldquolow level equilibrium&rdquo of low productivity, primitive production techniques, and low levels of living. 34

Deepak Lal, another economist, similarly explained economic stagnation in a low level &ldquoHindu equilibrium&rdquo around the caste system, which bought stability in the context of political warfare, monsoon failure and climatic uncertainty, labor shortage, and an under-valued merchant class. 35 David Landes, the historian, blames the enervating heat, which is deleterious to work. For this reason, rich countries lie in temperate zones and the poor in the tropics and semi-tropics. 36

While institutions and culture do matter undoubtedly, we are all skeptical of national stereotypes and easy cultural explanations of the sort that were common hundred years ago. In my experience, successful Hindu entrepreneurs can be both extremely otherworldly in religion and aggressive in business. The Indian farmer, despite being caught in the caste system, responds quickly to market based incentives, as the Green Revolution testifies. Brahmins, who are supposed to have contempt for manual labor, will plough their land vigorously if they have to. And Rajput Thakurs, who never worked for a living, will shed their feudal ways for the sake of a commercial opportunity. Moreover, there are substantial non-Hindus in India and these communities had also been stuck in the same rut of stagnation. Other Asian countries were equally backward, but they had no &ldquoHindu equilibrium&rdquo to explain away their stagnation. Finally, the same Indians when they migrate to other countries perform better.

Thus, I am uncomfortable with the &ldquootherworldly values of the Hindus&rdquo or the &ldquoimmobilizing effects of the caste system&rdquo and the &ldquoconservative habits of the merchant caste&rdquo. I believe that Sir John Hicks' Economic Principle does trump in most cases. It states that &ldquopeople would act economically when the opportunity of an advantage was presented to them they would take it.&rdquo 37 It explains not only the diffusion of the Green Revolution across India but also the demographic transitions currently underway in many states.

When seeking an explanation for a nation's wealth and poverty, my preferred method is to begin with economic factors as proximate causes that motivate a businessman to invest--the size of the market, the capability of suppliers, distribution hurdles, and the state of competition. If this does not satisfy, I seek answers in institutions, some of which are, of course, intimately tied to culture. I have found that institutions can evolve rapidly as incentives change in society and can be transferred fairly quickly for example, during the 1990s India was able to dismantle many of the institutions of Nehruvian socialism and replace them with capitalist institutions. Finally, if none of these factors provide a satisfactory explanation, then I turn to attitudes and social structure.

I find Deepak Lall's distinction between material and cosmological beliefs useful. 38 The material beliefs of a civilization are about ways of making a living and are the subject of economics cosmological ones are about how to live and are in the realm of 'culture'. The rise of the west was accompanied by a change in both sets of beliefs, but East Asia's success has needed mainly a change in material beliefs&mdashit has become prosperous without losing its soul. In other words, it is possible to modernize without westernizing. Ever since the British Raj material beliefs have been changing in India unlike our cosmological beliefs.

Our continuing inability to distinguish between the &ldquomodern&rdquo and the &ldquowestern&rdquo in India is surely the cause of some of our grief. If we could only accept that a great deal of modern western culture, especially its material beliefs, are not the West's property, but are a universal, critical way of thinking, which belongs to all rational human beings. We would not waste our energies on swadeshi (protectionism) hindutva (preserving the ancient Hindu civilization), and futile language debates (&ldquoremove English from primary schools&rdquo). The debate between modernisation and westernisation, begun in early nineteenth century by Ram Mohan Roy, continues to rage in India. At the root is a fear of the loss of the Indian way of life. The older generation fears it more than the young, whose minds are more decolonised and who are more confident in adopting the West's material beliefs without fearing the loss in its cosmological ones.

The situation in China

Since the beginning of the Chinese economic reform launched by Deng Xiaoping in 1978, China has passed from a closed, centralized economic system to a market economy. The reforms began with the dismantling of the communal systems in the countryside, moving on to the liberating of prices, to fiscal decentralization, to greater autonomy of state companies, to the development of the private sector, to the development of a financial market and to a modern banking system, up to the opening of business abroad and the Direct Foreign Investments (IDE).

In 2010 China became the largest exporter of essential goods and surpassed Japan in terms of gross internal production (PIL). The restructuring of the Chinese economy has increased the PIL tenfold since 1978. Measured in terms of buying power equivalent (PPA), in 2015 China became the largest economy in the world, passing the United States for the first time in history.

Nevertheless, the per capita income of Chinese residents remains below the world average. Moreover, the Chinese government has numerous difficult challenges to face, among which are:

  • Reducing the enormous savings rate for families and promoting domestic consumption
  • Increasing work opportunities in sectors with high paying salaries and promoting the hiring of newly-graduated students
  • Reducing the level of corruption and other economic crimes
  • Reducing environmental pollution
  • Reversing the aging process of the population.

In response to these problems in 2015 the Chinese government, during the Thirteenth Five-Year Plan, emphasized the need for new and effective economic reforms to increase innovation and domestic consumption so that the Chinese economy is less dependent on fixed investments, exports, and heavy industry.

The Economic History of India, 1857-1947

The biggest value &aposEconomic History of India, 1857 to 2010&apos by Tirthankar Roy adds is to situate Indian economic history in the context of scholarship on global economic history. Economic historians are primarily interested in two puzzles:

1. Why is the world unequal two centuries after the industrial revolution began in Western Europe?
2. There is acute poverty amidst industrialization in South Asia. Is it because of endogenous factors such as culture, institutions, geography, etc. or exogenous f The biggest value 'Economic History of India, 1857 to 2010' by Tirthankar Roy adds is to situate Indian economic history in the context of scholarship on global economic history. Economic historians are primarily interested in two puzzles:

1. Why is the world unequal two centuries after the industrial revolution began in Western Europe?
2. There is acute poverty amidst industrialization in South Asia. Is it because of endogenous factors such as culture, institutions, geography, etc. or exogenous factors such as colonial rule and globalization?

Indian economic history is dominated by the Marxist school of thought and its African and South American variants which puts colonialism at the root of all of India's institutional failures in economics and politics. While approaches like 'unequal exchange' or 'dependency theory' have been successful in explaining colonialism's persistent effect on the economy, there has been research in more recent years from the 'scientific paradigm' that allows one to determine what exactly the persistent effect of colonialism is, and what the effect is due to the presence of extractive institutions following transition to post-colonial governments. Roy presents India's development path under British colonialism and its immediate aftermath beyond colonialism. In the fourth edition published in 2020, he updates it till the year 2010. Of course, this is a textbook for undergraduate students. So it consists of sweeping narratives that are presented with excellent footnotes and boxes describing case studies. I highly recommend going through them.

What does this approach offer which the Marxist analysis doesn't? One, it problematizes India's experience of indentured labour export to the South Pacific and Caribbean as something more than slavery. Roy argues that this movement of labour was not just forced, but there was a sizeable transfer which was voluntary as famines were ravaging the Indian subcontinent. For many, this offered itself as an avenue to escape death due to hunger. Another case in point are famines. The most popular explanation for famines in the late 1800s till the 1943 Bengal famine was that of British misadministration put forward by the Nobel laureate, Amartya Sen. In this analysis, Roy shows how mortality rates should have fallen once the British left if famines were only because of poor British administration. So he presents the under-documented cases of improvement in private grain trade in the subcontinent during this time which was possible due to the dense network of railways set up by the British. Thirdly, it also present fantastic summaries of newer research which looks at regional differences in the persistent effects of colonialism. Say, Laxmi Iyer's work on how land tenure differences between areas under direct British rule and those under indirect British rule have had different effects on poverty and inequality.

This is quite possibly one of the best books on Indian economic history and I look forward to reading Roy's non-fiction work on private entrepreneurship and business in India. . more

Economic Impact of the British Rule in India | Indian History

In this article we will discuss about:- 1. Disruption of the Traditional Economy 2. Ruin of Artisans and Craftsmen 3. Impoverishment of the Peasantry 4. Ruin of Old Zamindars and Rise of New Landlordism 5. Stagnation and Deterioration of Agriculture 6. Development of Modern Industries 7. Poverty and Famines.

  1. Disruption of the Traditional Economy
  2. Ruin of Artisans and Craftsmen
  3. Impoverishment of the Peasantry
  4. Ruin of Old Zamindars and Rise of New Landlordism
  5. Stagnation and Deterioration of Agriculture
  6. Development of Modern Industries
  7. Poverty and Famine

1. Disruption of the Traditional Economy:

The economic policies followed by the British led to the rapid transformation of India’s economy into a colonial economy whose nature and structure were determined by the needs of the British economy. In this respect the British conquest of India differed from all previous foreign conquests.

The previous conquerors had overthrown Indian political powers, but had made no basic changes in the country’s economic structure they had gradually become a part of Indian life, political as well as economic. The peasant, the artisan and the trader had continued to lead the same type of existence as before.

The basic economic pattern that of the self-sufficient rural economy, had been perpetuated. Change of rulers had merely meant change in the personnel of those who appropriated the peasant’s surplus. But the British conquerors were entirely different. They totally disrupted the traditional structure of the Indian economy.

Moreover, they never became an integral part of Indian life. They always remained foreigners in the land, exploiting Indian resources and carrying away India’s wealth as tribute. The results of this subordination of the Indian economy to the interests of British trade and industry were many and varied.

2. Ruin of Artisans and Craftsmen:

There was a sudden and quick collapse of the urban handicrafts industry which had for centuries made India’s name a byword in the markets of the entire civilized world. This collapse was caused largely by competition with the cheaper imported machine made goods from Britain.

We know the British imposed a policy of one­ way free trade on India after 1813 and the invasion of British manufactures, in particular cotton textiles, immediately followed. Indian goods made with primitive techniques could not compete with goods produced on a mass scale by powerful steam-operated machines.

The ruin of Indian industries, particularly rural artisan industries, proceeded even more rapidly once the railways were built. The railways enabled British manufactures to reach and uproot the traditional industries in the remotest villages of the country. As the American writer, D.H. Buchanan, has put it, “The armour of the isolated self-sufficient village was pierced by the steel rail, and its life blood ebbed away.”

The cotton-weaving and spinning industries were the worst hit. Silk and woolen textiles fared no better and a similar fate overtook the iron, pottery, glass, paper, metals, guns, shipping, oil-pressing, tanning and dyeing industries.

Apart from the influx of foreign goods, some other factors arising from British conquest also contributed to the ruin of Indian industries. The oppression practiced by the East India Company and its servants on the craftsmen of Bengal during the second half of the eighteenth century, forcing them to sell their goods below the market price and to hire their services below the prevailing wage, compelled a large number of them to abandon their ancestral professions. In the normal course, Indian handicrafts would have benefited from the encouragement given by the Company to their export, but this oppression had an opposite effect.

The high import duties and other restrictions imposed on the import of Indian goods into Britain and Europe during the eighteenth and nineteenth centuries, combined with the development of modern manufacturing industries in Britain led to the virtual closing of European markets to Indian manufacturers after 1820.

The gradual disappearance of Indian rulers and their courts who were the main customers of the handicrafts produced also gave a big blow to these industries. “For instance, the Indian states were completely dependent on the British in the production of military weapons.”

The British purchased all their military and other government stores in Britain. Moreover, Indian rulers and nobles were replaced as the ruling class by British officials and military officers who patronized their own home-products almost exclusively. This increased the cost of handicrafts and reduced their capacity to compete with foreign goods.

The ruin of Indian handicrafts was reflected in the ruin of the towns and cities which were famous for their manufacture. Cities which had withstood the ravages of war and plunder failed to survive British conquest. Dhaka, Surat, Murshidabad and many other populous and flourishing industrial centres were depopulated and laid waste.

By the end of the nineteenth century, urban population formed barely 10 per cent of the total population.

William Bentinck, the Governor-General, reported in 1834—5:

“The misery hardly finds a parallel in the history of commerce. The bones of the cotton-weavers are bleaching the plains of India.”

The tragedy was heightened by the fact that the decay of the traditional industries was not accompanied by the growth of modern machine industries as was the case in Britain and western Europe. Consequently, the ruined handicraftsmen and artisans failed to find alternative employment. The only choice open to them was to crowd into agriculture.

Moreover, the British rule also upset the balance of economic life in the villages. The gradual destruction of rural crafts broke up the union between agriculture and domestic industry in the countryside and thus contributed to the destruction of the self- sufficient rural economy.

On the one hand, millions of peasants, who had supplemented their income by part-time spinning and weaving, now had to rely overwhelmingly on cultivation on the other, millions of rural artisans lost their traditional livelihood and became agricultural labourers or petty tenants holding tiny plots. They added to the general pressure on land.

Thus British conquest led to the de-industrialisation of the country and increased dependence of the people on agriculture. No figures for the earlier period are available but, according to Census Reports, between 1901 and 1941 alone the percentage of population dependent on agriculture increased from 63.7 per cent to 70 per cent.

This increasing pressure on agriculture was one of the major causes of the extreme poverty in India under British rule.

In fact, India now became an agricultural colony of manufacturing Britain which needed it as a source of raw materials for its industries. Nowhere was the change more glaring than in the cotton textile industry. While India had been for centuries the largest exporter of cotton goods in the world, it was now transformed into an importer of British cotton products and an exporter of raw cotton.

3. Impoverishment of the Peasantry:

The peasant was also progressively impoverished under British rule. Although he was now free from internal wars, his material condition deteriorated and he steadily sank into poverty.

In the very beginning of British rule in Bengal, the policy of Clive and Warren Hastings of extracting the largest possible land revenue had led to such devastation that even Cornwallis complained that one-third of Bengal had been transformed into “a jungle inhabited only by wild beasts”.

Nor did improvement occur later. In both the Permanently and the Temporarily Settled Zamindari areas, the lot of the peasants remained unenviable. They were left to the mercies of the zamindars who raised rents to unbearable limits, compelled them to pay illegal dues and to perform forced labour or beggar and oppressed them in diverse other ways.

The condition of the cultivators in the Ryotwari and Mahalwari areas was no better. Here the government took the place of the zamindars and levied excessive land revenue which was in the beginning fixed as high as one-third to one-half of the produce.

Heavy assessment of land was one of the main causes of the growth of poverty and the deterioration of agriculture in the nineteenth century. Many contemporary writers and officials noted this fact. For instance, Bishop Heber wrote in 1826:

Neither Native nor European agriculturist, I think, can thrive at the present rate of taxation. Half of the gross produce of the soil is demanded by government. … In Hindustan [Northern India] I found a general feeling among the King’s officers… that the peasantry in the Company’s Provinces are on the whole worse off, poorer and more dispirited than the subjects of the Native Provinces and here in Madras, where the soil is, generally speaking, poor, the difference is said to be still more marked. The fact is, no Native Prince demands the rent which we do.

Even though the land revenue demand went on increasing year after year—it increased from Rs. 15.3 crore in 1857—58 to Rs. 35.8 crore in 1936—37—the proportion of the total produce taken as land revenue tended to decline, especially in the twentieth century as the prices rose and production increased.

No proportional increase in land revenue was made, as the disastrous consequences of demanding extortionate revenue became obvious. But by now the population pressure on agriculture had increased to such an extent that the lesser revenue demand of later years weighed on the peasants as heavily as the higher revenue demand of the earlier years of the Company’s administration.

Moreover, by the twentieth century, the agrarian economy had been ruined and the landlords, moneylenders and merchants had made deep inroads into the village. The evil of high revenue demand was made worse because the peasant got little economic return for his labour. The government spent very little on improving agriculture.

It devoted almost its entire income to meeting the needs of the British-Indian administration, making the payments of direct and indirect tribute to England, and serving the interests of British trade and industry. Even the maintenance of law and order tended to benefit the merchant and the moneylender rather than the peasant.

The harmful effects of an excessive land revenue demand were further heightened by the rigid manner of its collection. Land revenue had to be paid promptly on the fixed dates even if the harvest had been below normal or had failed completely. But in bad years the peasant found it difficult to meet the revenue demand even if he had been able to do so in good years.

Whenever the peasant failed to pay land revenue, the government put up his land on sale to collect the arrears of revenue. But in most cases the peasant himself took this step and sold part of his land to meet the government demand. In either case he lost his land.

More often the inability to pay revenue drove the peasant to borrow money at high rates of interest from the moneylender. He preferred getting into debt by mortgaging his land to a moneylender or to a rich peasant neighbour to losing it outright. He was also forced to go to the moneylender whenever he found it impossible to make both ends meet.

But once in debt he found it difficult to get out of it. The moneylender charged high rates of interest and through cunning and deceitful measures, such as false accounting, forged signatures and making the debtor sign for larger amounts than he had borrowed, got the peasant deeper and deeper into debt till he parted with his land.

The moneylender was greatly helped by the new legal system and the new revenue policy. In pre-British times, the moneylender was subordinated to the village community. He could not behave in a manner totally disliked by the rest of the village. For instance, he could not charge usurious rates of interest.

In fact, the rates of interest were fixed by usage and public opinion. Moreover, he could not seize the land of the debtor he could at most take possession of the debtor’s personal effects like jewellery, or part of his standing crop. By introducing transferability of land the British revenue system enabled the moneylender or the rich peasant to take possession of the land.

Even the benefits of peace and security established by the British through their legal system and police were primarily reaped by the moneylender in whose hands the law placed enormous power he also used the power of the purse to turn the expensive process of litigation in his favour and to make the police serve his purposes.

Moreover, the literate and shrewd moneylender could easily take advantage of the ignorance and illiteracy of the peasant to twist the complicated processes of law to get favourable judicial decisions.

Gradually the cultivators in the Ryotwari and Mahalwari areas sank deeper and deeper into debt and more and more land passed into the hands of moneylenders, merchants, rich peasants and other moneyed classes. The process was repeated in the zamindari areas where the tenants lost their tenancy rights and were ejected from the land or became subtenants of the moneylender.

The process of transfer of land from cultivators was intensified during periods of scarcity and famines. The Indian peasant hardly had any savings for critical times and whenever crops failed he fell back upon the moneylender not only to pay land revenue but also to feed himself and his family.

By the end of the nineteenth century, the moneylender had become a major curse of the countryside and an important cause of the growing poverty of the rural people. In 1911 the total rural debt was estimated at Rs 300 crore. By 1937 it amounted to Rs 1800 crore. The entire process became a vicious circle.

The pressure of taxation and growing poverty pushed the cultivators into debt, which in turn increased their poverty. In fact, the cultivators often failed to understand that the moneylender was an inevitable cog in the mechanism of imperialist exploitation and turned their anger against him as he appeared to be the visible cause of their impoverishment.

For instance, during the Revolt of 1857, wherever the peasantry rose in revolt, quite often its first target of attack was the moneylender and his account books. Such peasant actions soon became a common occurrence.

The growing commercialization of agriculture also helped the moneylender-cum-merchant to exploit the cultivator. The poor peasant was forced to sell his produce just after the harvest and at whatever price he could get as he had to meet in time the demands of the government, the landlord and the moneylender.

This placed him at the mercy of the grain merchant, who was in a position to dictate terms and who purchased his produce at much less than the market price. Thus a large share of the benefit of the growing trade in agricultural products was reaped by the merchant, who was very often also the village moneylender.

The loss and overcrowding of land caused by de-industrialisation and lack of modern industry compelled the landless peasants and ruined artisans and handicraftsmen to become either tenants of the moneylenders and zamindars by paying rack-rent or agricultural labourers at starvation wages.

Thus the peasantry was crushed under the triple burden of the government, the zamindar or landlord, and the moneylender.

After these three had taken their share not much was left for the cultivator and his family to subsist on. It has been calculated that in 1950-51 land rent and moneylenders’ interest amounted to Rs 1400 crore or roughly equal to one-third of the total agricultural produce for the year.

The result was that the impoverishment of the peasantry continued along with an increase in the incidence of famines. People died in millions whenever droughts or floods caused failure of crops and scarcity.

4. Ruin of Old Zamindars and Rise of New Landlordism:

The first few decades of British rule witnessed the ruin of most of the old zamindars in Bengal and Madras. This was particularly so with Warren Hastings’ policy of auctioning the rights of revenue collection to the highest bidders. The Permanent Settlement of 1793 also had a similar effect in the beginning.

The heaviness of land revenue—the government claimed ten-elevenths of the rental—and the rigid law of collection, under which the zamindari estates were ruthlessly sold in case of delay in payment of revenue, worked havoc for the first few years. Many of the great zamindars of Bengal were utterly ruined and were forced to sell their zamindari rights.

By 1815 nearly half of the landed property of Bengal had been transferred from the old zamindars, who had resided in the villages and who had traditions of showing some consideration to their tenants, to merchants and other moneyed classes, who usually lived in towns and who were quite ruthless in collecting to the last pie what was due from the tenant irrespective of difficult circumstances.

Being utterly unscrupulous and possessing little sympathy for the tenants, these new landlords began to subject the latter to rack-renting and ejectment.

The Permanent Settlement in north Madras and the Temporary Zamindari Settlement in Uttar Pradesh were equally harsh on the local zamindars. But the condition of the zamindars soon improved radically.

In order to enable the zamindars to pay the land revenue in time, the authorities increased their power over the tenants by extinguishing the traditional rights of the tenants. The zamindars now set out to push up the rents to the utmost limit. Consequently, they rapidly grew in prosperity.

In the Ryotwari areas too the system of landlord-tenant relations spread gradually. As we have seen above, more and more land passed into the hands of moneylenders, merchants and rich peasants who usually got the land cultivated by tenants. One reason why the Indian moneyed classes were keen to buy land and become landlords was the absence of effective outlets for investment of their capital in industry.

Another process through which this landlordism spread was that of subletting. Many owner-cultivators and occupancy tenants, having a permanent right to hold land, found it more convenient to lease out land to land-hungry tenants at exorbitant rent than to cultivate it themselves. In time, landlordism became the main feature of agrarian relations not only in the zamindari areas but also in the Ryotwari ones.

A remarkable feature of the spread of landlordism was the growth of subinfeudation or intermediaries. Since the cultivating tenants were generally unprotected and the overcrowding of land led the tenants to compete with one another to acquire land, the rent of land went on increasing.

The zamindars and the new landlords found it convenient to sublet their right to collect rent to other eager persons on profitable terms. But as rents increased, sub-leasers of land in their turn sublet their rights in land. Thus by a chain-process a large number of rent-receiving intermediaries between the actual cultivator and the government sprang up.

In some cases in Bengal their number went up to as high as fifty! The condition of the helpless cultivating tenants who ultimately had to bear the burden of maintaining this horde of superior landlords was precarious beyond imagination. Many of them were little better than slaves.

An extremely harmful consequence of the rise and growth of zamindars and landlords was the political role they played during India’s struggle for independence. Along with the princes of protected states, many of them became the chief political supporters of the foreign rulers and opposed the rising national movement. Realising that they owed their existence to British rule, they tried hard to maintain and perpetuate it.

5. Stagnation and Deterioration of Agriculture:

As a result of overcrowding in agriculture, excessive land revenue demand, growth of landlordism, increasing indebtedness and the growing impoverishment of cultivators, Indian agriculture began to stagnate and even deteriorate resulting in extremely low yields per acre. Overall agricultural production fell by 14 per cent between 1901 and 1939.

The overcrowding in agriculture and increase in subinfeudation led to subdivision and fragmentation of land into small holdings most of which could not maintain their cultivators. The extreme poverty of the overwhelming majority of peasants left them without any resources with which to improve agriculture by using better cattle and seeds, more manure and fertilisers, and improved techniques of production.

Nor did the cultivator, rack-rented by both the government and the landlord, have any incentive to do so. After all, the land he cultivated was rarely his property and the bulk of the benefit which agricultural improvements would bring was likely to be reaped by the horde of absentee landlords and moneylenders. Subdivision and fragmentation of land also made it difficult to effect improvements.

In England and other European countries, the rich landlords often invested capital in their land to increase its productivity with a view to sharing in the increased income. But in India the absentee landlords, both old and new, performed no useful function.

They were mere rent-receivers who had often no roots in the land and who took no personal interest in it beyond collecting rent. They found it possible and therefore preferred to increase their income by further squeezing their tenants rather than by making productive investments in their lands.

The government could have helped in improving and modernising agriculture. But the government refused to recognise any such responsibility. A characteristic of the financial system of British India was that, while the main burden of taxation fell on the shoulders of the peasant, the government spent only a very small part of it on him.

An example of this neglect of the peasant and agriculture was the step motherly treatment meted out to public works and agricultural improvement.

While the Government of India had spent by 1905 over 360 crore of rupees on the railways which was demanded by British business interests, it spent in the same period less than 50 crores of rupees on irrigation which would have benefited millions of Indian cultivators. Even so, irrigation was the only field in which the government took some steps forward.

At a time when agriculture all over the world was being modernized and revolutionised, Indian agriculture was technologically stagnating hardly any modern machinery was used. What was worse was that even ordinary implements were centuries old. For example, in 1951, there were only 930,000 iron ploughs in use while wooden ploughs numbered 31.8 million.

The use of inorganic fertilisers was virtually unknown, whereas a large part of animal manure, i.e. cow-dung, night-soil and cattle bones, was wasted. In 1922—23, only 1.9 percent of all cropped land was under improved seeds. By 1938-39, this percentage had gone up to only 11 per cent. Furthermore, agricultural education was completely neglected. In 1939 there were only six agricultural colleges with 1306 students.

There was not a single agricultural college in Bengal, Bihar, Orissa and Sind. Nor could peasants make improvements through self-study. There was hardly any spread of primary education or even literacy in the rural areas.

6. Development of Modern Industries:

An important development in the second half of the nineteenth century was the establishment of large-scale machine-based industries in India. The machine age in India began when cotton textile, jute and coal-mining industries were started in the 1850s. The first textile mill was started in Bombay by Cowasjee Nanabhoy in 1853, and the first jute mill in Rishra (Bengal) in 1855.

These industries expanded slowly but continuously. In 1879 there were 56 cotton textile mills in India employing nearly 43,000 persons. In 1882 there were 20 jute mills, most of them in Bengal, employing nearly 20,000 persons.

By 1905, India had 206 cotton mills employing nearly 196,000 persons. In 1901 there were over 36 jute mills employing nearly 115,000 persons. The coal-mining industry employed nearly one lakh of persons in 1906.

Other mechanical industries which developed during the second half of the nineteenth and the beginning of the twentieth centuries were cotton gins and presses, rice, flour and timber mills, leather tanneries, woolen textiles, sugar mills, iron and steel works, and such mineral industries as salt, mica and saltpeter.

Cement, paper, matches, sugar and glass industries developed during the 1930s. But all these industries had a very stunted growth.

Most of the modern Indian industries were owned or controlled by British capital. Foreign capitalists were attracted to Indian industry by the prospect of high profit. Labour was extremely cheap raw materials were readily and cheaply available and for many goods, India and its neighbours provided a ready market. For many Indian products, such as tea, jute and manganese, there was a ready demand the world over.

On the other hand, profitable investment opportunities at home were getting fewer. At the same time, the colonial government and officials were willing to provide all help and show all favours. Foreign capital easily overwhelmed Indian capital in many of the industries.

Only in the cotton textile industry did Indians have a large share from the beginning, and in the 1930s, the sugar industry was developed by Indians. Indian capitalist also had to struggle from the beginning against the power of British managing agencies and British banks.

To enter a field of enterprise, Indian businessmen had to bend before British managing agencies dominating that field. In many cases even Indian-owned companies were controlled by foreign-owned or controlled managing agencies.

Indians also found it difficult to get credit from banks most of which were dominated by British financiers. Even when they could get loans they had to pay high interest rates while foreigners could borrow on much easier terms.

Of course, gradually Indians began to develop their own banks and insurance companies. In 1914, foreign banks held over 70 per cent of all bank deposits in India by 1937, their share had decreased to 57 per cent.

British enterprises in India also took advantage of their close connection with British suppliers of machinery and equipment, shipping, insurance companies, marketing agencies, government officials and political leaders to maintain their dominant position in Indian economic life. Moreover, the government followed a conscious policy of favouring foreign capital as against Indian capital.

The railway policy of the government also discriminated against Indian enterprise railway freight rates encouraged foreign imports at the cost of trade in domestic products. It was more difficult and costlier to distribute Indian goods than to distribute imported goods.

Another serious weakness of Indian industrial effort was the almost complete absence of heavy or capital goods industries, without which there can be no rapid and independent development of industries. India had no big plants to produce iron and steel, or to manufacture machinery.

A few petty repair workshops represented engineering industries and a few iron and brass foundries represented metallurgical industries. The first steel in India was produced only in 1913. Thus India lacked such basic industries as steel, metallurgy, machine, chemical and oil. India also lagged behind in the develop­ment of electric power.

Apart from machine-based industries, the nineteenth century also witnessed the growth of plantation industries such as indigo, tea and coffee. They were almost exclusively European in ownership. Indigo was used as a dye in textile manufacture. Indigo manufacture was introduced into India at the end of the eighteenth century and flourished in Bengal and Bihar.

Indigo planters gained notoriety for their oppression over the peasants who were compelled by them to cultivate indigo. This oppression was vividly portrayed by the famous Bengali writer Dinbandhu Mitra in his play Neel Darpan in 1860. The invention of a synthetic dye gave a big blow to the indigo industry and it gradually declined.

The tea industry developed in Assam, Bengal, south India and the hills of Himachal Pradesh after 1850. Being foreign-owned, it was helped by the government with grants of rent-free land and other facilities. In time, the use of tea spread all over India and it also became an important item of export. Coffee plantations developed during this period in south India.

The plantation and other foreign-owned industries were of hardly any advantage to the Indian people. Their profits went out of the country. A large part of their salary bill was spent on highly paid foreign staff. They purchased most of their equipment abroad. Most of their technical staff was foreign.

Most of their products were sold in foreign markets and the foreign exchange so earned was utilised by Britain. The only advantage that Indians got out of these industries was the creation of unskilled jobs. Most of the workers in these enter­prises were, however, extremely low paid, and they worked under extremely harsh conditions for very long hours. Moreover, conditions of near-slavery prevailed in the plantations.

On the whole, industrial progress in India was exceedingly slow and painful. It was mostly confined to cotton and jute industries and tea plantations in the nineteenth century, and to sugar and cement in the 1930s.

As late as 1946, cotton and jute textiles accounted for 40 per cent of all workers employed in factories. In terms of production as well as employment, the modern industrial development of India was paltry compared with the economic development of other countries or those with India’s economic needs.

It did not, in fact, compensate even for the displacement of the indigenous handicrafts it had little effect on the problems of poverty and overcrowding of land. The paltriness of Indian industrialization is brought out by the fact that out of a population of 357 million in 1951 only about 2.3 million were employed in modern industrial enterprises.

Furthermore, the decay and decline of the urban and rural handicraft industries continued unabated after 1858. The Indian Planning Commission has calculated that the number of persons engaged in processing and manufacturing fell from 10.3 million in 1901 to 8.8 million in 1951 even though the population increased by nearly 40 per cent.

The government made no effort to protect, rehabilitate, reorganize and modernize these old indigenous industries.

Moreover, even the modern industries had to develop without government help and often in opposition to British policy. British manufacturers looked upon Indian textile and other industries as their rivals and put pressure on the Government of India not to encourage but rather to actively discourage industrial development in India. Thus British policy artificially restricted and slowed down the growth of Indian industries.

Furthermore, Indian industries, still in a period of infancy, needed protection. They developed at a time when Britain, France, Germany and the United States had already established powerful industries and could not therefore compete with them.

In fact, all other countries, including Britain, had protected their infant industries by imposing heavy customs duties on the import of foreign manufacturers. But India was not a free country.

Its policies were determined in Britain and in the interests of British industrialists who forced a policy of Free Trade upon their colony. For the same reason the Government of India refused to give any financial or other help to the newly founded Indian industries as was being done at the time by the governments of Europe and Japan for their own infant industries.

It would not even make adequate arrangements for technical education which remained extremely backward until 1951 and further contri­buted to industrial backwardness. In 1939 there were only 7 engineering colleges with 2217 students in the country.

Many Indian projects, for example, those concerning the construction of ships, locomotives, cars and aero planes, could not get started because of the government’s refusal to give any help.

Finally, in the 1920s and 1930s under the pressure of the rising nationalist movement and the Indian capitalist class, the Government of India was forced to grant some tariff protection to Indian industries. But, once again, the government discriminated against Indian-owned industries.

The Indian-owned industries such as cement, iron and steel, and glass were denied protection or given inadequate protection. On the other hand, foreign dominated industries, such as the match industry, were given the protection they desired. Moreover, British imports were given special privileges under the system of ‘imperial preferences’ even though Indians protested vehemently.

Another feature of Indian industrial development was that it was extremely lopsided regionally. Indian industries were concentrated only in a few regions and cities of the country. Large parts of the country remained totally underdeveloped.

This unequal regional economic development not only led to wide regional disparities in income but also affected the level of national integration. It made the task of creating a unified Indian nation more difficult.

An important social consequence of even the limited industrial development of the country was the birth and growth of two new social classes in Indian society—the industrial capitalist class and the modern working class. These two classes were entirely new in Indian history because modern mines, industries and means of transport were new.

Even though these classes formed a very small part of the Indian population, they represented new technology, a new system of economic organisation, new social relations, new ideas and a new outlook. They were not weighed down by the burden of old traditions, customs and styles of life.

Most of all, they possessed an all-India outlook. Moreover, both of these new classes were vitally interested in the industrial development of the country. Their economic and political importance and roles were, therefore, out of all proportion to their numbers.

A major characteristic of British rule in India, and the net result of British economic policies, was the prevalence of extreme poverty among its people. While historians disagree on the question whether India was getting poorer or not under British rule, there is no disagree­ment on the fact that throughout the period of British rule most Indians always lived on the verge of starvation.

As time passed, they found it more and more difficult to find employment or make a living. British economic exploitation, the decay of indigenous industries, the failure of modern industries to replace them, high taxation, the drain of wealth to Britain and a backward agrarian structure leading to the stagnation of agriculture and the exploitation of the poor peasants by the zamindars, landlords, princes, moneylenders, merchants and the state gradually reduced the Indian people to extreme poverty and prevented them from progressing. India’s colonial economy stagnated at a low economic level.

The poverty of the people found its culmination in a series of famines which ravaged all parts of India in the second half of the nineteenth century. The first of these famines occurred in western Uttar Pradesh in 1860-61 and cost over 2 lakhs of lives. In 1865-66 a famine engulfed Orissa, Bengal, Bihar and Madras and took a toll of nearly 20 lakhs of lives, Orissa alone losing 10 lakh people.

More than 14 lakhs of persons died in the famine of 1868-70 in western Uttar Pradesh, Bombay and Punjab. Many states in Rajputana, another affected area, lost one-fourth to one-third of their population.

Perhaps the worst famine in Indian history till then occurred in 1876—78 in Madras, Mysore, Hyderabad, Maharashtra, western Uttar Pradesh, and Punjab. Maharashtra lost 8 lakh people, Madras nearly 35 lakh. Mysore lost nearly 20 per cent of its population and Uttar Pradesh over 12 lakh.

Drought led to a country-wide famine in 1896-97 which affected over 9.5 crores of people of whom nearly 45 lakh died. The famine of 1899-1900 followed quickly and caused widespread distress. In spite of official efforts to save lives through provision of famine relief, over 25 lakhs of people died.

Apart from these major famines, many other local famines and scarcities occurred. William Digby, a British writer, has calculated that, in all, over 28,825,000 people died during famines from 1854 to 1901. Another famine in 1943 carried away nearly three million people in Bengal. These famines and the high losses of life caused by them indicate the extent to which poverty and starvation had taken root in India.

Many English officials in India recognised the grim reality of India’s poverty during the nineteenth century.

For example, Charles Elliott, a member of the Governor-General’s Council, remarked:

“I do not hesitate to say that half the agricultural population do not know from one year’s end to another what it is to have a full meal.”

William Hunter, the compiler of the Imperial Gazetteer, conceded that “forty million of the people of India habitually go through life on insufficient food.” The situation became still worse in the twentieth century. The quantity of food available to an Indian declined by as much as 29 per cent in the 30 years between 1911 and 1941.

There were many other indications of India’s economic backwardness and impoverishment. Colin Clark, a famous authority on national income, has calculated that during the period 1925-34, India and China had the lowest per capita incomes in the world. The income of an Englishman was five times that of an Indian.

Similarly, the average life expectancy of an Indian during the 1930s was only 32 years in spite of the tremendous progress that modern medical sciences and sanitation had made. In most of the West European and North American countries, the average age was already over 60 years.

India’s economic backwardness and poverty were not due to the niggardliness of nature. They were man-made. The natural resources of India were abundant and capable of yielding, if properly utilised, a high degree of prosperity to the people.

But, as a result of foreign rule and exploitation, and of a backward agrarian and industrial economic structure—in fact as the total outcome of its historical and social development—India presented the paradox of a poor people living in a rich country.

The poverty of India was not a product of its geography or of the lack of natural resources or of some ‘inherent’ defect in the character and capabilities of the people. Nor was it a remnant of the Mughal period or of the pre-British past.

It was mainly a product of the history of the last two centuries. Before that, India was no more backward than the countries of Western Europe. Nor were the differences in standards of living at the time very wide among the countries of the world. Precisely during the period that the countries of the West developed and prospered, India was subjected to modern colonialism and was prevented from developing.

All the developed countries of today developed almost entirely over the period during which India was ruled by Britain, most of them doing so after 1850. Till 1750 the differences in living standards were not wide between the different parts of the world. It is interesting, in this connection, to note that the dates of the beginnings of the Industrial Revolution in Britain and the British conquest of Bengal virtually coincide!

The basic fact is that the same social, political and economic processes that produced industrial development and social and cultural progress in Britain also produced and then maintained economic underdevelopment and social and cultural backwardness in India.

The reason for this is obvious. Britain subordinated the Indian economy to its own economy and determined the basic social trends in India according to her own needs.

The result was stagnation of India’s agriculture and industries, exploitation of its peasants and workers by the zamindars, landlords, princes, moneylenders, merchants, capitalists and the foreign government and its officials, and the spread of poverty, disease and semi-starvation.

Our Interpretation

Caveats aside, there are many stories that materialize from this simple chart. They include the colossal impact of the Industrial Revolution on the West, as well as the momentum behind the re-emergence of Asia.

But there’s one other story that ties it all together: the exponential rate of human economic growth that occurred over the last century.

For thousands of years, economic progress was largely linear and linked to population growth. Without machines or technological innovations, one person could only produce so much with their time and resources.

More recently, innovations in technology and energy allowed the “hockey stick” effect to come into play.

It happened in Western Europe and North America first, and now it’s happening in other parts of the world. As this technological playing field evens, economies like China and India – traditionally some of the largest economies throughout history – are now making their big comeback.

Editor’s note: We have adjusted the main graphic as of Sep 10, 2017 to change the description of the chart. It now says “Share of GDP (World Powers)” instead of the previous “Share of world GDP”, which was technically an inaccurate description.

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